Services Weekly Preview: Nov. 11-16, 2018

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As we build toward the middle of the quarter, we’re wrapping up our periodic assessments of IT services vendors. Like last week, we also have some semiannual analysis on vendors in the management consulting space.

Monday: 

  • KPMG’s risk-averse culture pressured its performance, causing the firm to drop a spot in terms of revenue size among peers in the latest assessment of the management consulting practice. A potential KPMG and Bain marriage, however, could be a way for the firm to catch up with rivals and disrupt the management consulting space.
  • Continued expansion of its onshore presence, including the recent build-out of its co-innovation center in London, improves HCLT’s value proposition by enabling it to work alongside its clients to create larger-scale transformation engagements. However, HCLT faces some challenges in recruiting talent to support new centers, spurring the implementation of employee development programs.

Tuesday: Although Atos will grow revenues at a slower rate in 2018, the expansion of the company’s Digital Transformation Factory portfolio and recently announced acquisition of SIX Payment Services, which is expected to close in 4Q18, will enable the company to accelerate revenue growth in 2019. TBR’s 3Q18 Atos report analyzes the implications from Atos’ ongoing activities, such as the Syntel acquisition and investments artificial intelligence (AI) and security solutions and capabilities.

Wednesday:

  • Senior Analyst Jen Hamel examines EY’s strategy to provide clients with technological enablement of business transformation in her profile on the firm for our Fall 2018 Management Consulting Benchmark. One key takeaway: Increasing its investment in technology-enabled services, including those involving blockchain and AI, by $1 billion over the next two years will improve EY’s competitiveness with solutions-led peers IBM and Accenture.
  • We continue looking for signs Wipro will see improved performance, as its India-centric peers have, to align with its digital transformation strategy and expanded portfolio and capabilities. In this latest assessment, we’re still searching.
  • Capgemini has made changes to its portfolio, organizational structure and sales model to address rising demand from clients’ business side, rather than their technology side. In TBR’s 3Q18 Capgemini report, we will dive deeper into topics such as AI, digital marketing, and Capgemini Invent, the new global business line Capgemini launched in September.
  • In TBR’s 3Q18 Perspecta Initial Response, we will provide an overview of Perspecta’s second quarter as an independent company. Made up of Hewlett Packard Enterprise’s former U.S. Public Sector business, Vencore and KeyPoint Government Solutions, Perspecta faces some challenging financial and resource-related issues as it works to find its footing as a stand-alone company.  

Thursday:

  • TBR’s 3Q18 Raytheon Intelligence, Information & Services (IIS) full report explores how the emerging geopolitical power struggle in space and cyberspace plays to Raytheon’s strengths in cyber hardening, computer network operations, advanced analytics and AI. The report examines how IIS was able to outgrow federal IT services competitors in 3Q18 and how its deep mission knowledge in the U.S. provides a strong foundation as it pursues riskier adjacent market opportunities in volatile markets such as the Middle East.
  • TBR’s 3Q18 Leidos full report examines the company’s first quarter of year-to-year organic revenue growth since it acquired Lockheed Martin’s IT services business in 2016. The report explains Leidos’ positioning across defense, health and civilian markets and how the company is adjusting to disruption amid the federal market’s shift from bespoke proprietary technology development to configurable commercial-off-the-shelf IT solutions.
  • In our 3Q18 results on Wednesday, TBR expects Cisco Services to continue to accelerate revenue growth during the rest of 2018 and in 2019, positively affected by Cisco’s ongoing portfolio investments in and acquisitions around next-generation and software-driven solutions that generate professional services opportunities. TBR expects Cisco’s recent acquisitions and partnerships in cloud, security and networking to generate increased professional and technical support services for Cisco Services during the coming quarters.

Friday:

  • The previous edition of TBR’s Management Consulting Benchmark Profile: PwC described the firm’s efforts to make its Business, Experience, Technology (BXT) framework a companywide endeavor. Six months later, we’ve seen signs the firm’s ambitions around BXT have evolved from aspirational to operational, with global examples of the framework becoming an on-the-ground reality in working with clients.
  • Partners enable Fujitsu to enhance its core services with cloud, software and digital capabilities, helping to ease clients’ transition into emerging areas while offsetting declines from traditional services. However, without expanding its client base outside of Japan, Fujitsu could face challenges in maintaining revenue growth.

Cloud repatriation follow-up: Do you really know the value proposition of cloud?

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A few weeks ago, I blogged my thoughts about cloud repatriation and how it feels like an over-emphasized trend. In my professional analysis amid researching various reports and interacting with data center vendors, one of the key pieces of the cloud repatriation narrative is that customers will move to cloud without a full picture of the costs and ultimately retreat to a more predictable environment. Seems like a reasonable hypothesis, but has this been tested? Also, is cost really the core decision driver?

A recent call with an enterprise IT buyer shone light on this topic, as much of their story about consuming IT didn’t align to the market generalizations. For starters:

  • The buyer is in the healthcare industry but is using cloud services, even migrating some critical applications like ERP to a SaaS-based solution. Generally, it’s thought that the industries with sensitive data will stay away from cloud solutions.
  • The company typically keep $500 million in the bank at any given time, meaning the perceived challenge of capex outlay associated with on-premises solutions isn’t much of an issue to drive it to adopt off-premises cloud solutions.
  • But the real kicker? The customer indicated its cloud-based solutions are at best cost-neutral and sometimes even more expensive than their on-premises counterparts.

This came as a bit of a surprise to me, as these elements are counter to the typical IT industry narrative. If an enterprise is investing in an off-premises solution already knowing they will pay the same or more than an on-premises solution, what’s the point?

Let’s look at this particular customer’s cloud journey. Their first foray into enterprise cloud was, like for many businesses, using Office 365 and products such as Exchange for email. Based on the value seen from this implementation, including reduced management overhead and end-user benefits, they started adopting cloud-based offerings in other areas of the IT stack.

When describing the organization’s process for making decisions around acquiring IT solutions, the buyer described a fairly complex, quantitative strategy for assessing the ROI of any given solution over a three-year period. The assessment includes four facets:

  1. Will it save time? This can include making IT employees more efficient or enabling business unit employees to improve their workflows.
  2. Will it save money? A detailed calculation considers elements like license costs, management overhead and how these will change over the three-year period.
  3. Will it make money? This particular buyer works for an organization that acquires other companies often. The buyer described a scenario where using cloud solutions helped integrate an acquisition target’s data within two weeks and enabled a new product to be launched within a month of the acquisition.
  4. Will it reduce risk? Risk can take many forms, from risk of an IT outage to risk of interrupted operations or compromised IT security.

This is one example from one enterprise, but it illustrates the point that cost is far from the only factor being weighed when making choices about how IT is going to be delivered. Or at the very least, cost is not simply what you pay for a solution; decision makers must consider the many risks and benefits that spider across an organization. A higher fee for an IT solution might be a small price to pay if it increases your time to market by three times or more. Moral of the story: Know what the actual criteria are for your customers’ decision making. You may be failing to sell to their most important buying points. Or, you may be sending the wrong message!

What Diane Greene’s Departure Means for Google Cloud

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“While the AI-centric strategy played to Google’s strengths, it didn’t help much with more boring workloads such as storage and website hosting that drive Amazon’s dominance and are the bulk of the cloud market. ‘They’ve been making the right moves and saying the right things, but it just hasn’t shown through in performance financially,’ says Meaghan McGrath, who tracks Google and other cloud providers at Technology Business Research. She says Google is still hamstrung by a perception that it doesn’t really know how to work with corporate IT departments—an area where Microsoft has a long track record.”

Atos expands reach in North America through the acquisition of Syntel

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On Oct. 9, Atos completed the acquisition of Syntel, adding close to $1 billion in revenues, 89% of which were generated in North America in 2017, as well as over 23,000 employees. This month, TBR analysts will travel to Dallas to hear further details on Atos’ plans with Syntel and further assess what this will mean for Atos and its competitors.

Syntel expands Atos’ transformational capabilities in North America

Syntel provides critical scale for Atos’ Business and Platform Solutions (B&PS) division in North America and enables Atos to expand its digital transformation activities in the region. As Syntel’s revenue is fully driven by B&PS activities, such as in digital, automation and robotics, the acquisition will enable Atos to diversify its revenue in North America, which has been largely reliant on Atos’ Infrastructure and Data Management (IDM) division. Selling Atos’ offerings in cybersecurity, big data and IDM to Syntel’s acquired client base as well as offering Syntel solutions to Atos’ global clients and pursuing large-scale holistic digital transformation projects will drive revenue growth for Atos through 2021.

Syntel’s intelligent automation tools enable Atos to deliver cost-effective solutions to clients

Atos expects to generate $120 million in cost synergies through the acquisition, which, together with the addition of Syntel’s efficient business model, will boost Atos’ profitability. While G&A rationalization, real estate management and procurement will drive cost synergies, the main lever will be the rollout of Syntel’s delivery model for Atos’ large B&PS accounts, which make up $1.3 billion in annual revenues and 36% of B&PS revenue. Notably, Atos plans to adopt Syntel’s delivery model and integrate its processes; tools, such as intelligent automation tools called SyntBots; metrics; and 18,000 employees in India to improve Atos’ cost base and augment B&PS operating margin, which was 7.4% in 1H18.

Atos increases cloud services opportunities

Reinforcing its cloud capabilities through the acquisition of Syntel enables Atos to expand client reach in North America and increase hybrid cloud orchestration activities. Atos has already rebranded Syntel to Atos Syntel, which is now a separate Atos brand, and Syntel’s Cloud Services offerings are being marketed to clients as Atos Syntel Cloud Services. Syntel provides Atos with added expertise from more than 50 cloud projects and cloud services offerings that better enable Atos’ enterprise IT solutions to deliver a “digital backbone” to clients. The Atos Syntel Cloud Services offerings are supported by Syntel’s IP-based accelerators and automation tools such as the SyntBots. TBR expects Atos will work toward a unified cloud services portfolio by integrating Atos Syntel Cloud Services with Atos’ existing cloud capabilities, such as Atos Canopy Orchestrated Hybrid Cloud.

Atos is an expert in integrating acquisitions, such as that of Syntel

Let’s look at Atos’ track record on acquisitions: Following its strategy to add digital technology capabilities and intellectual capital, and augment its position in e-payments, the company acquired seven companies during 2017 and announced three acquisitions in 2018, two of which — Syntel and Air-Lynx have closed — while SIX Payment Services is pending approval. The company has a history of successfully integrating acquisitions, some small and others large, such as Siemens IT Solutions and Services (SIS), which added approximately 28,000 people to Atos in 2011. SIS had experienced lingering revenue declines and low profitability levels; however, during the integration process, Atos was able to restructure SIS so that Atos’ profitability was not negatively affected and improved in the following years. TBR expects Syntel will have an overall positive affect for Atos in terms of client reach; expanded solutions capabilities, especially around digital, cloud and automation; and profitability. Syntel, which had an operating margin of 25% in 2017, driven by efficient and automated processes, will boost Atos’ profitability as Atos adopts Syntel’s model of operations in B&PS.

Services weekly preview: Nov. 5-9, 2018

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Well into the third quarter of industry earnings and our periodic assessments of IT services vendors, TBR’s analysts this week will also share their semiannual analysis on vendors in the management consulting space

Monday: In 3Q18 Infosys signed 12 large deals with a total contract value over $2 billion, but the company’s delivery framework remains fragile as Infosys maintains its margin-first culture. In our full report on Infosys, Senior Analyst Boz Hristov notes that open-source solutions will support Infosys’ efforts to compete on price as it morphs its value proposition toward becoming a platform-based company. Returning to sustainable double-digit revenue growth will remain a mirage in the next two years.

Tuesday: Senior Analyst Jen Hamel’s initial take on IBM Services’ 3Q18 earnings performance noted that while internal transformation efforts expanded margins, stalled revenue growth shows the company’s work is far from over. The full report expands upon the implications of IBM’s ongoing transformation, including the recent announcement of plans to acquire Red Hat, for IBM Services’ future as a leading IT services vendor.

Wednesday:

  • Analyst Kevin Collupy’s initial report on DXC Technology’s (DXC) quarterly earnings will explore the company’s approach to software and partnerships and its continued use of acquisitions to fill talent and portfolio gaps. We expect tepid growth through the remainder of the year and likely modest organic year-to-year declines, highlighting the importance of strategic acquisitions.
  • In the last edition of the McKinsey & Co. Management Consulting Benchmark profile, I anticipated a slowdown in the firm’s acquisition pace and questioned whether McKinsey could assimilate new capabilities and roll out new offerings, especially around digital, design and analytics. This profile publishing this week will detail how McKinsey performed through the start of this year and how the firm has positioned itself well to benefit from competitors preparing the market for digital transformation.

Thursday: Analyst John Caucis’ initial response to DXC’s earnings and the fiscal performance of the company’s healthcare IT services (HITS) business will cover a mix of positive and negative developments in the fiscal quarters ended 2Q18 and 3Q18 (semiannual report). DXC continues to execute strongly in APAC, particularly in Australia, but indications of difficulties in Europe began to surface in 3Q18. Meanwhile in DXC’s core U.S. market, disruptions appear to be lingering from the spin-merge with Hewlett Packard Enterprise (HPE) Enterprise Services, delaying a rebound in healthcare IT services growth.

Friday: In this edition of the semiannual look at Accenture’s management consulting practice, Boz will note that the company will rely on patented, artificial intelligence-enhanced solutions to maintain revenue growth momentum and withstand threats from the Big Four and IBM. However, adding tech-centric offerings and engineering-trained resources may pressure its management consulting brand, while a potential large-scale management consulting acquisition could help the company address buyers’ perception.

Oracle implores enterprises to adopt its uniquely architected cloud stack

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Oracle reinforces its cloud stack to accelerate enterprise cloud adoption

Oracle has a strong portfolio of cloud applications that are proving competitive in the market against more narrowly focused or less integrated SaaS competition. Oracle’s core platform and infrastructure businesses, however, are proving a harder sell, implied by financial results and qualitative context, despite significant innovations over recent years. The tone of Oracle OpenWorld 2018 mirrored its overall performance: The company is well positioned and executing in cloud application adoption initiatives, and is well positioned but facing stalling sales in the infrastructure business.

Applications updates were minimal but valuable

As Oracle executives pointed out, Oracle has been able to position itself well in the SaaS market by buying and building applications across both front- and back-office functional areas, leaving few holes in its horizontal applications portfolio. This relatively comprehensive portfolio, particularly across the back office with integrated ERP and Human Capital Management (HCM) suites, positions the company well as more customers look to adopt cloud applications — both voluntarily to achieve efficiencies, and under duress to plan migrations as other vendors’ on-premises products are given end-of-support deadlines. Strengthening the value of its applications at the annual event, Oracle announced artificial intelligence (AI)-based capability additions to its ERP and HCM portfolios, including chatbots, recommendation engines and process automation. Oracle also enhanced select supply chain management applications with blockchain-enabled tracking and controls to increase value for customers. These advancements add value for customers but do not significantly alter Oracle’s back-office portfolio.

 

 

Oracle’s (NYSE: ORCL) annual conference, Oracle OpenWorld 2018, took a different tone than in recent years. With corporate focus narrowed around the cloud portfolio, and key product foundations already in place, keynotes and announcements were more focused on improvements to existing applications and the database and infrastructure architecture underpinning all cloud services. This year’s event doubled down on themes of past years, including Oracle CEO Mark Hurd’s previous keynotes concerning macroeconomic trends and predictions for the cloud market, and introduced a panel of distinguished U.S. and U.K. security personnel that painted a bleak cybersecurity picture, subtextually in support of a secure, single-vendor cloud stack that Oracle is positioning itself to best address.

Specialized industry expertise and agile service delivery position NIIT Technologies to disrupt incumbents

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The rising tide of digital transformation demand continues to lift all boats, particularly small, intensely industry-focused IT services players, such as NIIT Technologies, that aggressively and tactically align their portfolio offerings and go-to-market strategies with the evolving needs of their clients and target markets. Though the long-term sustainability of NIIT Technologies’ rapid revenue growth and margin expansion remains to be seen, its strong performance in a services arena nearing saturation deserves the attention of global technology and IT services peers.

Strong financial performance highlights the success of NIIT Technologies’ pivot toward digital

CEO Sudhir Singh kicked off the event with a summary of NIIT Technologies’ recently reported FY2Q19 earnings results:

  • Revenue for the quarter ending Sept. 30, 2018, grew 23.1% year-to-year and 10% sequentially, in local currency, to Rs. 907.4 crores ($129.5 million U.S. dollars [USD]).
  • Operating margin expanded 186 basis points year-to-year to 18%.
  • Fresh order intake increased for the sixth consecutive quarter to $160 million USD, including 10 new logos.
  • Digital revenue reached 28% of total revenue, expanding 11.6% sequentially in local currency.
  • Headcount crossed the 10,000 mark, with 261 additions during the quarter. During 2018 NIIT Technologies has added 1,000 employees, with 499 in digital areas. Despite double-digit headcount expansion, utilization has also increased (80.4% in FY2Q19) while attrition has stayed well below that of Tier 1 India-centric peers, hovering between 10% and 11%.

Though relatively smaller in scale compared to Tier 1 India-centric peers, NIIT Technologies prided itself on its relatively balanced geographical mix for a company its size (e.g., only about 49% of revenue comes from the U.S., about 34% from Europe and the remainder from Rest of World), on par with Tata Consultancy Services [TCS]). The company also touted its culture, built upon a heritage of learning and research, that empowers employees with both technology skills and design thinking expertise to create business-relevant solutions for clients.

 

 

TBR attended NIIT Technologies’ U.S. Analyst & Advisor Forum in Boston, where the company’s executive leadership team presented on the company’s recent financial performance, strategy and portfolio offerings with an overarching theme of “Engage with the Emerging.” The event’s agenda was organized in line with NIIT Technologies’ recent restructuring around three core verticals ― travel and transportation (T&T), banking and financial services (BFS), and insurance ― and five service lines ― Intelligent Automation, Digital, Data and Analytics, Cloud, and Cybersecurity ― which the company brings together in matrixed offerings. Leaders from each of the three industry verticals and several of the service lines presented individual sessions on their areas, in some cases with clients. TBR also interacted one-on-one with executives throughout the event.

BearingPoint offers collaborative transformation that integrates advisory services and solutions

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BearingPoint is transforming from a consulting company that delivers services in a traditional way into a company that is flexible in the way it works with clients and values innovation, collaboration and entrepreneurship. In a discussion, BearingPoint’s new Managing Partner Kiumars Hamidian stated, “We try to reduce the use of PowerPoint with clients,” which essentially leads to increased interactions during the proposal and solution development phases. On the other hand, BearingPoint is increasing its use of collaborative activities with clients and encouraging people to bring their best ideas, often using design thinking and agile-based methodologies. BearingPoint places innovation at the center of its activities across its three business pillars — Consulting, Solutions and Ventures — utilizing its “Be an Innovator” process to generate ideas for new services. The company uses IP assets such as accelerators, as well as incubators and ventures, to drive innovation.

BearingPoint is a European consulting company with global market reach

Executing on its three priorities — markets, portfolio and people — and utilizing its three business pillars will enable BearingPoint to continue to grow revenues and reach its 2020 overall revenue goal of €1 billion (or $1.2 billion). On the markets side, BearingPoint positions as an independent and partner-owned management and technology consulting company that has European roots and global reach and enables clients predominantly in its core European territory to become global leaders. Utilizing its European market reach and a new design and brand profile that emphasizes creativity, innovation, and a collaborative, agency-like approach, BearingPoint is set to attract such clients. As BearingPoint updates its brand profile to represent the company’s diversity, its bold, fresh and modern character will likely lead to growth opportunities, especially in new digital segments. To serve clients outside its core territory, BearingPoint utilizes its Global Reach Offices in Dallas and Shanghai and expands its global market reach through consulting and technology partnerships, such as with West Monroe Partners in North America, ABeam Consulting in APAC and Grupo ASSA in LATAM.

 

 

BearingPoint selected Lisbon, Portugal, as the host city for its Analyst Summit 2018. The event, which was held on Oct. 11, was not a traditional analyst day, as it was held at a former needle manufacturing facility, rather than in a conference room, and the vendor refrained from using PowerPoints to display its capabilities. Instead, the vendor transformed the facility to use personalized setups and spark attendees’ imaginations, and it relied on engaging conversations to gain the attention of the audience. The agenda was rich in topics, ranging from strategic and business overviews to five client case representatives talking onstage about their work with BearingPoint. The company also used a mobile app that was specifically developed for the event to provide personalized information about the event, share files and take live polls of the audience, which further enhanced engagement with the audience.